Malaysia's fiscal deficit to narrow, but spending risks persist: BMI

KUALA LUMPUR: BMI has maintained its forecast for Malaysia's fiscal deficit to narrow to 3.4 per cent of gross domestic product (GDP) in 2027 from an estimated 3.6 per cent in 2026.

The Fitch Solutions unit said it expects the government to attain its 2027 revenue target of RM380.8 billion, a 4.7 per cent year-on-year (y-o-y) increase from the upward revised 2026 target of RM363.3 billion.

"We anticipate that revenue collections will benefit from a favourable growth backdrop.

"The Ministry of Finance had revised higher its 2026 growth projections to 4.8-5.3 per cent (BMI: 5.1 per cent) from 4.0-5.0 per cent previously. It expects growth to moderate to 4.25.2 per cent in 2027 (BMI: 4.5 per cent)," BMI said in a statement.

It further said resilient economic activity should support sales and service tax collections, which have risen from around 7.5 per cent of total revenue in 2009 to 18.0 per cent by the first half (H1) 2026.

Meanwhile, higher oil prices are expected to boost Malaysia's petroleum-related revenue, supported by its position as a net energy exporter.

The government expects dividends from Petroliam Nasional Bhd (Petronas) to increase to RM32 billion in 2027 from an estimated RM27 billion in 2026.

"While this suggests that petroleum-related revenue will probably inch higher from 2.5 per cent of GDP in 2026 to 2.6 per cent in 2027, the broader downtrend in Malaysia's reliance on petroleum-related income remains intact," it said.

Operating expenditure is expected to remain high, accounting for 82 per cent of total expenditure, driven by higher subsidies and social assistance, including RM16 billion in cash assistance for low-income households and a rise in the minimum wage to RM2,000 from RM1,700.

The allocation for subsidies and social assistance was raised to RM74.5 billion, or 3.2 per cent of GDP, from the original RM49 billion, amid higher energy costs.

Although spending is expected to ease to RM72.7 billion in 2027, prolonged US-Iran conflict could increase subsidy spending further.

Meanwhile, the development expenditure is set to fall for the third consecutive year to RM83 billion in 2027 (3.6 per cent of GDP), below the RM86 billion annual average implied by the government's RM430 billion commitment through 2030.

BMI said lower development spending could weigh on Malaysia's longer-term productivity and innovation goals, while severe El Niño conditions could prompt additional subsidies for the agricultural sector.

On Oct 9, Prime Minister and Finance Minister Datuk Seri Anwar Ibrahim tabled Budget 2027, which totals RM459.8 billion in expenditure — a 3.6 per cent y-o-y increase from Budget 2026.

The government has targeted a deficit of 3.3 per cent of GDP in 2027, marking a gradual pace of consolidation from the revised 2026 target of 3.6 per cent and 3.5 per cent previously, it added.